3 Reasons Utilities Will Soar in 2013

2012 was a tough year for utilities. A macroeconomic mess and fiscal cliff fears left this industry lagging the S&P 500 by more than 12 percentage points. But 2013 could be a comeback year, reversing 2012's slump and pulling in profits for your portfolio. Here are three reasons why.

1. The grid
Electricity infrastructure is in a sorry state. While other industries have embraced and adopted technological innovation, the time, cost, and regulatory burden of utilities upgrades have left this sector in the dark.

Smart grid technology offers a solution to many of the most annoying and expensive problems that utilities experience by localizing electricity generation and constantly adapting supply to meet demand. Early adopters of smart grid technology include Exelon (NYSE: EXC  ) and PPL (NYSE: PPL  ) .

Exelon's three regulated utilities have invested more than $14 billion over the last 10 years, with much of this going toward smart grid initiatives. They are installing nearly 8 million smart meters, upgrading substations, and implementing a variety of innovative pricing models. To help offset improvement costs, Exelon has secured at least $400 million in grants from the Department of Energy.

PPL received a three-year, $40 million federal stimulus grant to run a pilot project in Pennsylvania. The project has been running for six months, and is already providing cheaper, greener, and more consistent energy to 60,000 customers. Over the next five years, PPL expects to invest $3.5 billion to bring its systems into the 21st century.

2. Clean energy
Over the past few decades, our dependence on foreign oil has caused a plethora of geopolitical nightmares, costing Americans (and foreigners) thousands of lives and billions of dollars.

To put an end to this trend, President Obama outlined a new Blueprint for a Secure Energy Future in 2011. While there's plenty of cannon fodder for energy companies, the game is changing for utilities, as well.

The blueprint paves the way for cleaner, smarter electricity production over the next 25 years. More specifically, the hope is to double America's share of clean electricity from 40% to 80% by 2035.

As energy choices continue to expand, utilities' energy portfolios will make or break their profitability. There's no secret recipe, and different corporations are trying on a variety of fixes. NextEra Energy (NYSE: NEE  ) is the nation's largest producer of renewable energy with heavy reliance on wind.

Thanks to the renewal of wind's production tax credit, this energy's cost effectiveness continues to put it on level playing ground with other sources. Even as NextEra's sales have fallen 6.5% over the past five years, the utility has managed to increase net income by 17%.

General Electric (NYSE: GE  ) provides a unique entry point to clean energy, regardless of who's buying. The company partnered with PPL on its smart grid project, sells its WindBOOST technology to NextEra, and its Ecomagination division created 140 products and pulled in $100 billion in sales in 2012.

3. Dividend dynamite
Leading up to the fiscal cliff, investors fled from dividend stocks amid fears of a massive dividend tax hike. But when Congress compromised, they barely nudged the tax scenario for utilities, clearing the path for reinvestment.

Utilities like Atlantic Power (NYSE: AT  ) offer dynamite dividends, but investors should know that some yields might be little more than bullish bait for a careless investor. While Atlantic's 9.4% yield is enough to make any dividend investor salivate, the utility might need to rethink its capital allocation in the coming years. Alternatively, National Grid's 4.1% yield is much lower, but its positive cash flow and reasonable payout ratio might be a better match for your portfolio's long-term prospects.

Ready, set, grow!
2012's slump provides a unique buying opportunity for the utilities sector, but investors need to be more aware than ever that there will be winners and losers in this industry. The same reasons that utilities are heading for new heights are the same reasons some will stumble. I've made outperform calls on NextEra, General Electric, and Exelon on my Motley Fool Caps page, and am looking forward to seeing where this sector heads in 2013.

As 2013 opens the door to clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. This strength combined with an increased focus on renewable energy, along with its recent merger with Constellation, puts Exelon and its best-in-class dividend on a short list of top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 15, 2013, at 6:42 PM, DividendDude wrote:

    There are some interesting facts in this article. I tend to ignore articles (like this one) that are very similar to an article by the same author posted the previous week for no real reason (see "How 1 utility's 2012 will shape it's 2013"). Was somethong wrong with the article last week? Or is there something wrong with it this week? Who knows - it seems kind of shady - doesn't pass the initial smell test.

  • Report this Comment On January 16, 2013, at 12:01 PM, jambo297 wrote:

    Agree DividendDude. I have followed utilities for 30+ years on the operations side. I worked for their suppliers for those years and am still involved. Fuel cost and rates for electricity are key. All utilities are down because demand (and electricity prices) are down. I like MF blogger Joshua Bondy's article on the increasing natural gas price: http://beta.fool.com/mrcanadian1/2013/01/11/increasing-natur.... I also like Lior Cohen's article:http://beta.fool.com/liorc/2013/01/04/utility-company-able-t.... These are good analysis.

    I own PPL and WEC mainly because they keep it simple; keep generating assets in good repair and are coal based. My bet is natural gas price will continue to rise though not steeply. The economy will continue growth. Coal is competitive at $3.50 - $4.00 nat. gas per mmbtu. N. gas price today is 3.30 up from 2.50 or so a year ago.

    FE and DUKE are sluggish with swallowing acquisitions and IMO EXC will be too.

  • Report this Comment On January 17, 2013, at 9:04 PM, arkhon wrote:

    jambo, your comments are more informative than this entire article. I don't quite get the point of reading such a general piece that sprinkles in a bunch of tickers.

    Info about electricity consumption and rates from the U.S. Energy Information Administration can be found here: http://www.eia.gov/electricity/data.cfm

    they also have info on nat. gas.

    Also agree with you about Duke and EXC

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